Accounting Definition
Before we go any further, it’s better for us to know several things about accounting. In a simple way, we can define accounting as a process of identifying, measuring, and communicating all the economic events of a business entity. The economic events must be relevant to the business of the entity. Based on the simple definition of accounting, we have three activities of the process:
1. Identifying
In this process, we do an analysis of the economic events to get the events that relevant to the business entity (ex: transactions)
2. Measuring (Recording)
Based on the identifying process, we record, classify, and summarize the relevant economic events that can be measured in local currency such as the dollar, rupee, yen, etc.
3. Communicating
The last activity of the process is to communicate the information that we had recorded, classified, and summarized before to the users. How we communicate the information? The answer is we have to prepare the financial statement. A financial statement is prepared based on the standards such as International Accounting Standards (IAS). In the next articles, we will know more about financial statement. The users will analyze the financial statement to make some important decisions.
The Users of Accounting Information
Generally, the users of accounting information (accounting report) can be divided into two categories:
1. Internal Users
The internal users of accounting information consist of the decision makers such as managers. For example: In manufacturing companies, the accounting information gives a snapshot of the production activities and helps the manager to know whether the production activities run efficiently or not. Also to decide which product line will be produced in bigger portion than the other product line.
2. External Users
There are many external users of accounting information.
a. Investors and Potential Investors
For the potential investors, accounting information (financial statements) will help them to know the financial position, the profitability, the sustainability, and other financial information of a company before they make the decision to invest their money to the company. For the current investors, the accounting information can help them to make a decision whether they still hold their investment or not based on the financial health of the company.
b. Creditors
Generally, bankers are the main creditors of a company. Accounting information is very important for the creditors to know the ability of the company to pay their debts. Also for evaluating the credit risks.
c. Government
Tax Authority uses the accounting information to ensure that the companies’ tax have been paid based on the tax regulation.
d. Suppliers
Suppliers use the accounting information of their partner company to make sure that the company can pay their debt because most of the transactions are on credit.
e. Customer
The Customer also uses the financial information of a company as a benchmark before they buy a product. For example, a customer has a plan to buy a car. But when he decided to go to the dealer, he got information that the company financial health was in a bad position and may go bankrupt. As soon as he got the information, he cancelled the plan to buy the car and considered of another brand because he worried about the after sales service, the resale value, and the availability of the spare parts.
f. Other Users
Other users of accounting information such as students, researchers, economic analysts, and other users use accounting information for their own purpose.
